Cable's mansion tax fails to scare industry

31 October 2011

With chancellor George Osborne now seriously considering abolishing the 50% Income Tax rate for those earning above £150,000, the possibility of the coalition implementing business secretary Vince Cable’s proposed 1% annual mansion tax on the up-to-date value of homes worth above £2m can no longer be ignored.

The government needs to be seen as fair. If the wealthy are given a tax advantage with one hand, they need to be handed out a tax penalty with the other. What then would be the impact on the housing and mortgage markets?

It is understood that the tax would only be levied on the proportion of the property worth above £2m, although no formal proposals are yet on the table so there has been a distinct lack of concrete research into the potential implications.

But those prepared to volunteer opinions at this stage are not forecasting any huge disruption to the housing market as a whole.

Sue Anderson, head of member and external relations at the Council of Mortgage Lenders, and Richard Barker, product manager for mortgages at Norwich and Peterborough Building Society, envisage that any impact on the mainstream mortgage market would be limited because there is little feed across from the expensive end.

After all, multimillion pound home buyers are a different breed. Many purchases are made in cash and when loans are required, most are from private banks.

Although mainstream lenders sometimes offer bespoke terms for high net worth purchasers, their standard products rarely extend beyond £1m.

The actual number of properties that would be affected by a mansion tax is also modest.

“There are only around 45,000 properties worth above £2m, so the impact on the housing market would be marginal,” says Suren Thiru, housing economist at Lloyds TSB.

“It would also be regional, with little impact outside London and some of the more expensive areas in the South-East.”

Paul Diggle, property economist at Capital Economics, argues that a mansion tax would be a relatively peripheral issue in the context of the housing market as a whole, and the national impact would be negligible.

“Even if it did have some impact, I would question the premise that lower house prices are a bad thing,” he says.

But Stuart Adam, senior research economist at the Institute for Fiscal Studies, is more cautious.

He says that while we may assume mansions have nothing to do with other properties, in reality they can be converted into flats or developers can build other things on the land.

“The main impact of a mansion tax would be to reduce the price of mansions, but there would be a knock-on effect to the prices of other types of houses,” he says. “I wouldn’t want to put a precise number on it but there is no reason why it should destabilise the housing market.”

Nevertheless, a number of commentators point out that any political noise about increasing tax on property could potentially affect confidence because of concerns that other tax increases may start appearing on the horizon.

Matthew Sinclair, director of The TaxPayers’ Alliance, is concerned that a change in the way mansions are taxed could just be the beginning.

“Changes to vehicle excise duty were supposed to target gas guzzlers but actually increased rates on lots of modest family cars, like the Vauxhall Zafira,” he says.

“Even Income Tax was originally supposed to be a temporary imposition on the well-off, but it is now paid by people in poverty and dependent on welfare.”

At the top end of the market, opinion is divided as to whether a mansion tax would have any noticeable impact on house prices. The optimists point out that high value homes have been bucking the general trend. For example, recent research by Lloyds TSB has found that properties in Britain worth at least £1m which account for just 1.1% of total sales increased in value by 10% in the first half of 2011.

This was in marked contrast to the 9% fall in residential property sales as a whole over the period.

The fact that prices at the top end didn’t seem to be adversely affected by the increase in Stamp Duty from 4% to 5% on homes worth above £1m this April is also commonly volunteered as evidence that wealthy buyers tend not to be too bothered by having to pay a little extra for a property.

London, where the Lloyds TSB research shows almost two-thirds of recent property sales of over £1m occurred, is also noted for its unusually strong credentials for overseas investors.

“If a mansion tax was going to have a significant effect then the recent increase in Stamp Duty from 4% to 5% would have also done so,” says Ray Boulger, senior technical manager at John Charcol. “But there was no significant fall in prices and the only effect it had was that many people tried to push transactions through by April 5.

“London is a micro-market and performs differently to the rest of the housing market. In the months since April the top end of the London market has performed better than pretty much any other place.”

At the moment, people living in Italy, Spain, Greece and Portugal are increasingly desperate to get money out on the basis that some of these countries will default or leave the euro and devalue.

“If you’ve exported your capital before devaluation, you don’t lose out,” Boulger adds. “The UK is seen as one of the most politically stable places in world and London is such a strong international centre.”

Liam Bailey, head of residential research at Knight Frank, is unusual in disputing that the Stamp Duty increase didn’t have an impact.

While acknowledging that prices of high value homes have continued to rise, he suspects that transaction volumes on these declined during recent months.

“Volumes on homes worth above £1m have been down around 40% since 2007 and my feeling is they have probably dipped a bit further since April as a result of the introduction of the 5% Stamp Duty,” he says.

Even if the Stamp Duty rise didn’t have an impact, there is surely a major difference between a one-off tax on a property purchase and a regular annual tax on property values, as is intended with a mansion tax?

Scott Rawlings, director of London-based IFA Radcliffe & Newlands, arranges loans on properties above £2m regularly. These are normally either for clients who want to borrow a small proportion of the purchase value with a view to paying it off in a few months’ time, when their cash flow improves, or those who want to borrow around 80% of the property value but intend to repay it in three to five years via stock options.

“Most clients barely noticed when Stamp Duty went up to 5% and none bothered to comment,” he says. “But a regular 1% tax would definitely impact on these properties.

“I would expect most properties worth above £2m to lose 5% to 10% of their value immediately after the tax comes in. It would make buyers twitch but it wouldn’t make them stop buying.”

Gavin Tank, partner at national IFA Positive Solutions, who is also involved with high value lending, agrees that an annual tax would be a more important consideration than the Stamp Duty rise because clients tend to be conscious of ground rents and service charges. Nevertheless, he feels that a mansion tax probably wouldn’t make any difference.

“I think it would make people raise a few eyebrows and question what they are doing but I think almost everything would still go ahead,” he says.

“Many of these buyers are foreign investors from Russia, the Middle East, China and Japan, and have seemingly boundless wealth. The British market also offers clear and assured title and you know to the inch what the boundaries are to your property.

“In some parts of Europe, planning inconsistencies can cause you problems and it’s only in the US, and perhaps Australia and South Africa, where you can get similar clarity to the UK in terms of what you’ve bought and what you own. Many people have bought here because they feel safe. There are just so many wealthy individuals who will buy in central London at whatever price and some will pay a premium to stop others buying. So it would be viewed as just another tax.”

With no-one predicting that a mansion tax will prove earth-shattering at any end of the housing market, more intellectual energy is being expended on second-guessing exactly how such a tax could be structured. Some commentators feel that what is needed is a reform of the Council Tax system, which currently assesses all properties on 1991 values and which charges all those with a value of above £320,000 the same rate.

“There is a good argument to be made that high value properties are under-taxed because Council Tax is not proportionate, so there is a decent case for bringing it up to date and making it proportionate,” says Adam.

“So while I think the Liberal Democrat proposal to have a new tax on the up-to-date value of mansions is a good idea, why only use it for mansions?”

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